Income Tax

Bad Debt’s Write Off Can’t Be Adjusted In Book Profits

The ITAT Bangalore pronounced a judgement on 19th December 2022 in case titled M/s Mindtree Ltd Vs DCIT in respect of the cross-appeals against the order of FCIT (Appeals)-11, Bangalore, dated 17.8.2022 for the assessment year 2012-13, wherein the Tribunal held that the bad debts which are reduced from the asset side of the debts which amounts to actual write off could not be adjusted for book profits u/s.115JB. The present article discusses the aspects covered in the case.

Facts of the Case

• The assessee has a business of software development consultancy services which involves providing internet-enabling technology and wireless technology.
• The ITR (Income Tax Return) for the AY 2012-13 was filed by the assessee on 28.9.2012, declaring a total income of Rs.101 12, 19,490 which led to the case of the assessee being selected for scrutiny by the AO wherein he passed an order of assessment disallowing the depreciation on goodwill, the deduction u/s. 10AA and club expenses.
• Aggrieved by order of the AO, the assessee filed an appeal before the CIT (A), LTU, who partly allowed the appeal in favour of the assessee. Meanwhile, the AO also issued another notice dated 1.1.2016,  rectifying the book profits wherein, apart from the addition of the provision for bad debts, the disallowance u/s 14A for an amount of Rs.89,98,661,  was also added to the book profits vide notice dated 11.5.2015. In lieu of the same, the assessee filed a response on 21.1.2016 and resulting in the proceedings being dropped by the AO u/s. 154.
• The revisionary proceedings were initiated by the CIT (A), LTU, by way of issuance of notice u/s. 263 of the Act holding the assessment to be erroneous and prejudicial to the interest of the revenue to the extent that provision for bad debts and the disallowance u/s. 14A can’t be considered while computing the book profits u/s. 115JB.
• The AO made the aforementioned additions to the profits of the book through the order passed by him, thereby giving effect to the order u/s 263. The assessee preferred an appeal against the AO’s order passed u/s. 143(3) r.w.s. 263.
• The assessee was granted the relief by the CIT (A) to the extent of disallowance made under section 14A to be added to the book profits u/s. 115JB. The CIT (A) upheld the addition made to the book profits towards provision for bad debts.
• Upon being aggrieved by order of the CIT (A), both the revenue and the assessee are in appeal before the Tribunal wherein the appeal  of the revenue was against the order of the CIT (A), which was regarding the deletion of the adjustment to book profits towards section 14A disallowance to the tune of Rs. 89, 98, 66.

Grounds of Appeal of the Assessee

• The Order passed by the CIT (A) being unjustified in law and on the facts and circumstances of the case.
• Regarding adding back of bad debts of Rs.50, 22,576/- at the time of computing book profits under section 115JB:
  • The lower authorities have erred in considering the bad debts of Rs.50, 22,576/-as provision when it has to be considered as actually written off as held by the Apex Court and the jurisdictional High Court.
  • The lower authorities haven’t appreciated the aforesaid sum of Rs. 50, 22,576/- being in the nature of the write-off of bad debts. It can’t be added back to book profit as ‘the amount or amounts set aside as provision for diminution in the value of any asset’ under Clause (i) of Explanation 1 to Section 115JB.
  • The Learned CIT (A) has wronged in perversely stating that the Appellant tried to mislead by claiming that the amount had actually been written off without appreciating the explanation offered by the appellant as regards the nature of write-off as adumbrated in various decisions of the Apex Court and the high jurisdictional court.
  • The Learned CIT (A) has erred in perversely stating that the decision in CIT vs Yokogawa India Ltd is distinguishable by wrongly stating that there was an actual write-off of debt without it being carried forward to the subsequent year along with the provision.

• As regards levy of interest:
  • The lower authorities have erred in levying interest under section 234C of the IT Act.
  • The lower authorities have erred in levying interest under section 220(2) of the IT Act.
  • The lower authorities have levied interests’ u/s 234B and u/s 220(2), as the said disallowance isn’t tenable, and thus the question of levy of interest does not arise.
• Based on the above grounds and other grounds which may be urged at the time of hearing with the consent of the Learned CIT (Appeals), it was  prayed that the order passed u/s 143 (3) r.w.s. 263 of the IT Act be quashed, and the relief sought to be granted.

Submissions of the Parties

• One of the very first submissions of the AR was regarding the tax effect of the appeal of the revenue, which was less than Rs.50 lakhs, which must accordingly be dismissed on the ground of monetary limit as per CBDT Circular No.7/2019 dated 8.8.2019. No objections were raised in respect of this contention of the AR by the DR.
• The assessee had debited a sum of Rs.50, 22,576 to the P&L account and the provision for doubtful debts was credited accordingly in the year under consideration. The provision for doubtful debt stood at Rs.35 million as on 31st March 2011, and the same was increased by the amount debited to the P&L account during FY 2011-12, and accordingly, the provisions as of 31.3.2012 stood at 40 million.
• There has been a reduction in the provision for doubtful debts from trade receivables in the statement of accounts by the assessee, and the net amount is shown as trade receivables in the balance sheet.
• The submission of the assessee before the CIT (A) was in respect of the amount of Rs.50, 22,576 being in the nature of write off of bad debts, and accordingly, the same can’t be added back to book profits as per the contemplation in clause (i) of Explanation 1 to section 115JB (2) is the amount or amounts set aside as provision for diminution in the value of any asset. The assessee submitted that the impugned amount is not a provision but the actual diminution in the value of the asset and, therefore, cannot be adjusted against the book profits u/s. 115JB.
• The assessee, in this regard, relied on the decision of the Hon’ble Apex Court in the case of Vijaya Bank v. CIT, wherein it is observed that the provision for doubtful debt debited to the P&L account constitutes an actual write-off if the same is simultaneously reduced from the loans & advances/debtors and is shown as net of such provision.
• Ld. AR retaliated the submissions made before the CIT(A) and submitted that the reduction by the assessee, as referred to above, would mean that there is an actual write-off in the books of accounts. The ld. AR, therefore, made the submission that the assessee’s case is covered by the ratio laid down by the Hon’ble Apex Court in the case of Vijaya Bank.
• Ld. AR also drew the attention of the tribunal towards the decision of the jurisdictional High Court in the case of CIT v. Yokogawa India Ltd. That upheld a similar view.
• In the present case, the assessee had written off the debts, which is an asset and therefore, the CIT (A) has correctly considered the issue under clause (i) and not under clause (c). The plain reading of the above provisions clears out that the provision made towards diminution in the value of assets has to be added.
• On the contrary, the ld DR submitted that decision of the Karnataka High Court in the case of Yokogawa India Ltd. was delivered regarding adjustment made under clause (c) of Explanation 1 to section 115JB (2) and, therefore, the same cannot be applied in assessee’s case wherein the adjustment is made by invoking clause (i) of Explanation (1) to section 115JB (2). The further submission of the LD was that the provision debited to the P&L account and credited to the provision account could not be construed as an actual write-off.

Judgement

It was held that the bad debts had been actually written off and was not a provision following the decision of the Apex Court in the case of Vijaya Bank (supra). Accordingly, the actual write-off of the asset can’t be considered as an addition under clause (i) of Explanation 1 to section 115JB.

With regard to the contention of the ld DR that the decision of the jurisdictional High Court in the case of Yokogawa India Ltd, could not be applicable, and as the question of law relates to whether the Appellate Authorities were correct in holding that the provisions made for bad and doubtful debts cannot be added back in accordance with the Explanation (c) to Section 115JB(1) of the Act, the ratio laid down by the Hon’ble High Court is that the if there has been a reduction of the doubtful or debt bad from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to Section 115JA or JB can’t be attracted. Therefore the tribunal held that the bad debts, which are reduced from the asset side of the debts, which amounts to actual write-off, couldn’t be adjusted for book profits u/s.115JB.

The tribunal also dismissed the appeal of the revenue, holding that the tax effect of the impugned amount is less than Rs.50lakhs and the ground for dismissal was that the same is below the monetary limit for filing the appeal before the Tribunal as per the circular.

Conclusion 

The judgement can be considered as yet other significant decisions on matters regarding 115JB of the Income Tax Act 1961^[1] and specifically on the matters of the bad debt’s write-off.

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